Un­for­tu­nately, not all the fun­da­men­tals of a ro­bust con­sumer econ­omy are in place, writes Andile Makholwa

Financial Mail - Investors Monthly - - Front Page -

The sharp fall in the oil price has brought an un­ex­pected wind­fall to South African con­sumers, who have bat­tled to re­cover from the eco­nomic slump of 2009.

This should be good news for re­tail­ers, as a lit­tle boost in con­sumers’ dis­pos­able in­come im­plies more spend­ing. How­ever, this time around it may not work out like that, as not all the fun­da­men­tals of a ro­bust con­sumer econ­omy are in place.

From the record high of $112/bbl in June, the price of crude oil has dropped sig­nif­i­cantly, to be­low $60/bbl at the time of writ­ing.

Econ­o­mists ex­pect it to re­main at this level for some time, or to drop even fur­ther.

In SA, the de­crease has trans­lated into a con­sid­er­able drop in the price of fuel. For in­stance, mo­torists in the in­land re­gions now pay R10,31 for a litre of 95 oc­tane un­leaded petrol — a huge re­lief from last year’s av­er­age price of R13,84. A mo­torist who puts in 50 litres three times a month stands to save more than R6 000 this year if the oil price re­mains un­der $60/bbl and the rand doesn’t weaken be­yond R11,30 against the dollar.

Trans­port costs make up about 16% of the av­er­age South African’s house­hold spend­ing.

FNB chief econ­o­mist Sizwe Nxed­lana says the re­duc­tion in the price of petrol is a “mas­sive ben­e­fit” to the con­sumer, as all of it is af­ter-tax money. He ex­pects the decline in the petrol price to knock about 1% on av­er­age off in­fla­tion, which would trans­late into av­er­age CPI of 3,5% this year. Less bullish econ­o­mists es­ti­mate CPI to av­er­age 4,2%, which would be the low­est in 10 years. Last year it av­er­aged 6,1%.

Mike Schus­sler, direc­tor at Econ­o­mists.co.za, says the av­er­age mo­torist should have about R570 more in his pocket in Fe­bru­ary than in May last year.

“The BankservAfrica dis­pos­able salary data shows that in De­cem­ber the av­er­age dis­pos­able salary on pay­rolls in SA was R12 600. This means about 4.5% of the take-home pay is freed to be spent on re­tail or ser­vices such as fast food or movies — or any­thing else,” says Schus­sler.

“Also, dis­pos­able salaries have in­creased nearly 9% on av­er­age in De­cem­ber above De­cem­ber 2013. This is about 3,5% more than in­fla­tion,” he says.

In short, says Schus­sler, the South African con­sumer will be bet­ter off this year. But what does that mean for re­tail­ers? Can they, too, ex­pect a wind­fall?

“I see re­tail sales up by 4%-plus af­ter in­fla­tion, for a few months at least. If oil stays low the con­sumer will be able to have a party with­out guilt, but some could hold back, as the petrol price is volatile,” says Schus­sler.

“If oil stays be­low $60/bbl, more and more spend­ing will take place on the re­tail side. Price drops on flights and farm prod­ucts will also help,” he says.

How­ever, he warns that though peo­ple will spend their money, it will not only be on re­tail. Some will be pay­ing off debts, oth­ers might fly off to see other places.

Nxed­lana equally ex­pects re­tail sales to im­prove from last year. “Re­tail­ers across the broad will ben­e­fit. The prob­lem is whether this is sus­tain­able. I don’t think it is, be­yond 12 months,” he says, re­fer­ring to the decline in the oil price.

He says since oil is a volatile com­mod­ity, it is hard to bank on its price.

Fur­ther, says Nxed­lana, a study FNB did late last year showed that lower-in­come

Food re­tail­ers, tra­di­tion­ally known a de­fen­sive stock, are in a bit of quandary. For them, slow­ing in­fla­tion is a dou­ble-edged sword

earn­ers were more ex­posed to debt than mid­dle to high-in­come earn­ers. That means re­tail­ers sell­ing to the mid­dle and up­per classes stand a bet­ter chance.

An­a­lysts polled by I-Net BFA seem to agree with Nxed­lana’s as­sess­ment. Among the top listed re­tail­ers, Wool­worths is the only share they rec­om­mend as a buy. The rest are holds.

How­ever, Nxed­lana warns that even though the study shows mid­dle and high-in­come earn­ers have dis­cre­tionary in­come, they are not ea­ger to make a big com­mit­ment due to the con­tin­ued volatil­ity of SA’s econ­omy.

“We are still in a volatile sit­u­a­tion,” he says. “On a look-through ba­sis, you can’t bank on the long-term sus­tain­abil­ity of this. Con­sumers should re­main pru­dent.”

Though there haven’t been ex­ten­sive job losses in the min­ing and man­u­fac­tur­ing sec­tors, em­ploy­ment re­mains weak. In past years, it’s been boosted by gov­ern­ment’s Ex­panded Public Works Pro­gramme.

The pri­vate sec­tor is still not hir­ing ow­ing to the sub­dued re­bound.

Nxed­lana says this is a strange phe­nom­e­non. Dur­ing a re­ces­sion com­pa­nies come un­der pres­sure, but in an up­turn they im­prove. How­ever, this is not hap­pen­ing in SA — the re­bound has been weak.

Re­tail­ers are equally cir­cum­spect about their prospects. The stan­dard mes­sage from CEOs as they re­port on their fes­tive trad­ing and give guid­ance for the year is that they are “cau­tiously op­ti­mistic”.

Food re­tail­ers, tra­di­tion­ally a de­fen­sive stock, are in a bit of a quandary. For them, slow­ing in­fla­tion is a dou­ble-edged sword. It could dampen their sales growth in the ab­sence of a pos­i­tive re­ac­tion in sales vol­ume. How­ever, the im­pact of the fuel price de­clines can­not be un­der­es­ti­mated.

Fuel costs range from 0,5% to 0,8% of food re­tail­ers’ an­nual sales. A 10% decline in fuel costs could boost earn­ings be­fore in­ter­est and tax by 1%-2%.

Gen­eral mer­chan­dise traders such as Mass­mart and durable goods mer­chants such as Lewis and the JD Group should also ben­e­fit from the re­duc­tion of fuel costs. How­ever, fur­ni­ture re­mains a tough sell. Sales up­dates re­cently re­leased by Lewis paint a grim pic­ture in the short term, but they do in­di­cate things may im­prove dur­ing the course of the year.

The group’s rev­enue for the nine months to De­cem­ber 31 grew by 4% and mer­chan­dise sales by 3%. That was an im­prove­ment on rev­enue growth of 1,6% and a mer­chan­dise sales decline of 3,5% re­ported for the six months to Septem­ber.

Lewis says the im­proved trad­ing was driven by higher lev­els of pro­mo­tional ac­tiv­ity and the con­tri­bu­tion from the newly ac­quired Beares stores. Ow­ing to the in­creased pro­mo­tional ac­tiv­ity to stim­u­late sales in re­sponse to the on­go­ing stock clear­ances at El­ler­ines, the group’s gross profit is slightly be­low last year’s level.

It is only the cloth­ing re­tail­ers that seem to have bet­ter prospects, though they are also com­ing un­der pres­sure from multi­na­tion­als en­ter­ing the mar­ket.

Dur­ban-based Mr Price has be­come an all-sea­sons op­er­a­tor with its cash sales model. While its credit-ori­en­tated peers had to battle it on price in past fes­tive sea­sons, Mr Price had a fairly good Christ­mas as con­sumers gen­er­ally switch to cash when the go­ing gets tough.

Tru­worths, his­tor­i­cally a trend­set­ter in the lo­cal fash­ion in­dus­try, seems to have come un­der pres­sure re­cently. As a re­sult, The Fos­chini Group has be­come the flavour of the month, bol­stered by its pur­chase of the UK’s Phase Eight fash­ion chain.

An­a­lysts are hop­ing that the repo rate will re­main un­changed for the re­main­der of this year, as there’s limited scope for a bullish rand tra­jec­tory.

“The lower oil price both in dol­lars and rands will keep in­fla­tion within the SA Re­serve Bank tar­get range of 3%-6%,” says Asief Mo­hamed, chief in­vest­ment of­fi­cer at Aeon In­vest­ment Man­age­ment.

That may give credit re­tail­ers more scope to sell on credit.

All of that would be good news, but SA also faces an­other cri­sis. The planned load shed­ding will not only not dis­rupt com­pa­nies’ sales, it will also re­sult in re­duced pro­duc­tion in sev­eral com­pa­nies, which will in turn re­duce salaries and there­fore dis­pos­able in­come.

Op­er­at­ing gen­er­a­tors while the elec­tric­ity is off has proved to be costly for many com­pa­nies.

Thus while 2015 por­tends great prospects for the re­cov­ery of con­sumers, sev­eral un­cer­tain events could thwart those prospects.

Dur­ing re­ces­sion, com­pa­nies come un­der pres­sure, but on the up­turn they im­prove… this is not hap­pen­ing in SA – the re­bound has been weak



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